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Understanding the Home Loan Interest Rate

There are two types of home interest rates:

1. The Variable Interest Rate when the mortgage is closing is also known as the ‘start rate’ or ‘teaser’.
2. The Fixed Interest Rate is set for a certain period. If you borrow at a time when interest rates are low then you will continue to benefit from the low rate agreed at the time you borrowed even if interest rates rise. This type of agreement allows you to budget easier as repayments will not fluctuate.

In South Africa, the interest rates decisions are taken by the South African Reserve Bank’s Monetary Policy Committee (MPC). The official interest rate is the repo rate. This is the rate at which central banks lend or discount eligible paper for deposit money banks, typically shown on an end-of-period basis. The current interest rate is 8.5%.
The Repo rate (repurchase rate) is the interest rate at which commercial banks can borrow money from the Reserve Bank.
South African banks in the private sector, like ABSA, Standard Bank, FNB and Nedbank, can borrow money from the South African Reserve Bank (SARB) at the Repo rate. The repo rate is the interest rate SARB charges the commercial banks for this privilege, so to make a profit, the banks then lend out this money to their own clients, at a higher interest rate.

home loan interest rate

How does the Repo Rate affect individuals?

The prime lending rate is affected when the repo rate changes, that in turn affects the interest rate that the commercial banks charge their customers. For example if the repo rate is increased, the interest rate from the bank on an individual loan is also increased (with some exceptions, e.g. if you have a fixed rate loan).
How does the Repo Rate affect the economy?
The repo rate is one factor that controls the supply of money in South Africa, which in turn has an influence on things like:
• consumer spending power,
• national debt levels,
• business growth, and
• Inflation.

When the repo rate is lowered, the money supply is increased.

Economy is stimulated by lowering the repo rate to encourage business growth and consumer spending, because businesses and consumers because money can be borrowed at cheaper rates.
The flip side of the coin is that this increase in money supply makes the currency more vulnerable to inflation. The Supply and Demand of money needs to be balanced as with any other commodity, when there is more money available, the value of money decreases.
When the repo rate is hiked, the money supply is decreased.
This is used to keep balance inflation, but it discourages business growth and consumer spending, because it makes it more expensive for businesses and consumers to borrow money. This also places significant pressure on businesses and consumers who’ve overextended themselves with debt. A few consecutive hikes in the repo rate are usually accompanied by an increase in bad debts, property and vehicle repossessions, liquidations and bankruptcies.

Who controls the Repo Rate?

Approximately six times a year, a group of people called the Monetary Policy Committee (MPC), meet up to decide if and how the repo rate should be changed. According to SARB’s website: “Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly”.
The inflation target is for the year-on-year increase in the headline CPI (CPI for all urban areas) to be between 3 and 6 per cent on a continuous basis as from 25 February 2009.
In other words, the main aim of the MPC is to keep inflation in check, but this is influenced by factors like the exchange rates, oil prices and other economic conditions. Time is also money and by changing the repo rate or inflation, this is not always immediately felt by all the consumers.

Interest Rate change from 1967-2013
home loan interest rates


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